(Answered) Let pt denote the aggregate price level at time t the

Economics

Let Pt denote the aggregate price level at time t. The inflation rate from time

t - 1 to t, denoted by τ , is defined as

τt =Pt - Pt -1 , Pt -1

(a) Write the first order homogeneous difference equation for the price level and solve it.

(b) If the annual inflation rate remains stable at 3.5 %, what is the aggregate price index after 10 years? (Hint: the initial price level is the price index at the base year).

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